Prepared remarks
Good day and welcome to Zedge’s Earnings Conference Call for the Second Quarter Fiscal 2025 Results. During management's prepared remarks, all participants will be in a listen-only mode. After today's presentation by Zedge’s management, there will be an opportunity to ask questions. I will now turn the call over to Brian Siegel.
Thank you, operator. During today's call, Jonathan Reich, Zedge's Chief Executive Officer; and Yi Tsai, Zedge's Chief Financial Officer will discuss Zedge's financial and operational results that were reported today. Any forward-looking statements made during this conference call, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results in the future to differ materially from those discussed on today's call. These risks and uncertainties include, but are not limited to, specific risks disclosed in Zedge’s periodic SEC filings. Zedge assumes no obligation to update any forward-looking statements or to update the factors that may cause actual results to differ materially from those they forecast. Please note that our earnings release is available on the investor relations page of the Zedge website; it has also been filed on Form 8-K with the SEC. Finally, on this call, we will use non-GAAP measures. Examples include non-GAAP EPS, non-GAAP net income, and adjusted EBITDA. Please see our earnings release for an explanation of our use of these non-GAAP measures. Now, I would like to turn the call over to Jonathan.
Thank you, Brian. Good afternoon, everyone, and thank you for joining us today to discuss Zedge's second quarter fiscal 2025 results. This quarter presented a challenging macro environment, negatively impacting ad revenue. For the most part, the unclear regulatory status of a TikTok ban resulted in TikTok pulling back on user acquisition spend, which had a ripple effect across the industry on companies where ad spend is an important revenue driver. Both Apple and Google removed TikTok from their storefronts for close to a month. With less demand from higher bidders, CPMs fell across the industry. Although our optimization efforts did enable our overall CPMs to rise versus last year, helping offset the lower demand and lower MAU (Monthly Active Users) sets. While total revenue declined 10% year-over-year to $7 million, TikTok’s return to the Apple and Google app stores in fiscal Q3 is yielding encouraging results even as we await a final outcome about TikTok’s future in the U.S. The other key event during the quarter was our announced restructuring in order to improve operational efficiency, profitability, and free cash flow.
Overall, between our restructuring and other items, we expect to reduce our annualized expense run rate by approximately $4 million, primarily related to a 22% reduction in our global workforce, driven by cuts to the GuruShots team and the closure of our Norway office. Taken together, this will yield annualized cost savings of approximately $3 million in compensation-related and other expenses, and $1.2 million in savings resulting from the expiration of the retention bonus payments owed to GuruShots employees under the terms of the April 2022 acquisition. Our financials will start reflecting these savings in Q3 and culminate in Q4. The impetus for undertaking the restructuring was to improve efficiency, enhance our ability to invest in growth opportunities, and position Zedge for sustainable profitability. In addition, we expect this will help us in generating free cash flow. I also want to underscore that we acted decisively to mitigate the impact of TikTok’s mandated withdrawal from the market by focusing efforts on areas under our control, such as further optimizing our ad inventory.
For example, this quarter we added new demand partners and a new ad unit. With these continual optimizations, we are enhancing engagement-driven monetization strategies and strengthening our subscription and premium offerings. Our quarterly subscription revenue growth remained strong, increasing 13% year-over-year, reflecting our success in effectively monetizing our user base. We continue to reap the benefits of our revamped subscription offering and upselling legacy subscribers to higher value plans, which helped drive a 22% increase in active subscribers. This quarter, we not only experienced an uptick in subscriptions from well-developed markets but also from emerging markets, which points to our ability to iterate until achieving success. Zedge Premium continued to see strong momentum, with GTV (Gross Transaction Value) growing 27% year-over-year. Our relentless efforts to optimize monetization continue to pay off.
For example, the work we’ve done with rewarded video has made this category a powerful monetization channel for increasing Zedge Premium’s GTV. Rewarded video usage grew nearly 40%, with impressive low-double-digit conversion rates, effectively activating a new segment of purchasers of smaller volumes of Zedge credits and expanding the overall ecosystem. The launch of pAInt 2.0 on iOS in September and Android in October was also significant to our gen AI strategy, introducing powerful new creation capabilities, including image-to-image and real-time photo editing. pAInt has gained significant traction over the past year, with increasing engagement metrics from a low-single-digit percentage of Zedge Marketplace's daily users to a low-double-digit percentage more recently. Engagement metrics specific to pAInt surged more than 100% year-over-year in February, further underscoring its growing popularity.
Let’s not forget that gen AI is still early in consumer market adoption, and we offer a great product for an attractive price. In the coming quarters, we plan to further expand the Zedge Marketplace's gen AI capabilities by offering an AI audio creator. This expansion represents a significant opportunity to further engage with users in an emerging and growing vertical, with the goal of converting our consumers into creators by empowering them with an easy way to make awesome ringtones, sound effects, and personalized audio clips. By diversifying our AI-driven offerings, we aim to tap into the growing demand for customizable audio content while opening new monetization opportunities. While GuruShots faced continued challenges in Q2, our late-January restructuring plan will help lower costs and drive the business toward breakeven, as we revamp the unit for growth. Fortunately, there was only a slight sequential revenue decline when compared to Q1.
Looking beyond the cost structure improvements we made, we are early in the process of reimagining GuruShots 2.0 and looking at everything from gameplay, to content generation, to monetization and more to unlock value from this asset. Once the strategy and roadmap are solidified over the next few quarters, we will begin to allocate investment based on key milestones to enhance engagement and long-term revenue potential. Emojipedia's results were roughly flat compared to last year. On a positive note, the introduction of Emojipedia’s first AI feature, an AI emoji generator, monetized with rewarded videos, has been encouraging. Users can now design their own custom emojis, allowing them to easily make their creative dreams a reality. This is in keeping with our goal of turning consumers into creators. Additionally, we plan to continue expanding the Emoji Sandbox over time with new content and features.
And finally, we are in the process of redesigning the Emojipedia.org website to a more modern, user-friendly experience, which we believe will drive further engagement. Looking ahead, we are cautiously optimistic that the worst of the ad revenue decline is behind us. Although TikTok is back in the market at this time, we will continue to monitor the situation and adjust accordingly if the situation is resolved in an adverse manner. That said, we are excited by the potential of the roadmap for all of our products. We continue to believe our stock is significantly undervalued based on multiple valuation metrics, and we expect to continue actively buying back shares under our existing $5 million authorization. With that, I’ll now turn the call over to Yi to discuss our financials in more detail.
Thank you, Jonathan. Total revenue in the second quarter was $7 million, down 10% from last year, mainly due to the advertising headwinds the industry faced in the quarter that Jonathan mentioned, and the continued challenges at GuruShots. Second quarter subscription revenue was up 13% from last year and our net active subscriber growth trend continued to improve, up 22% year-over-year, and sequentially for the seventh straight quarter. Our higher value iOS subscriptions and value-added Zedge+ offering for Android are not only seeing organic growth, but they also continue to outpace churn, mainly replacing lower-cost legacy subscriptions, which only removed ads. Zedge Premium's GTV achieved roughly $700,000, up 27% versus last year as the combination of our feature and content offering, and monetization expertise continued to drive attractive growth. Despite the pressure on advertising, ARPMAU (Average Revenue Per Monthly Active User) still grew 9% year-over-year to $0.078.
GuruShots, which is reported under digital goods and services revenue, remained a challenge, down 33% from last year, but only 4% sequentially. We expect the year-over-year comps to start to improve in our fourth quarter and into 2026. Cost of revenue was 6.4% for the quarter, roughly flat year-over-year on an absolute basis. SG&A (Selling, General and Administrative ) increased by 9% to $7.1 million during the quarter. This increase was mainly driven by marketing expenses related to higher paid user acquisition at the Zedge Marketplace, and our subscription model has higher near-term expenses as the timing of revenue and costs do not align. This is especially the case for a lifetime subscription, which carries a higher platform fee than an annual subscription. For example, for a lifetime subscription, platform fees are expensed immediately, while revenue is recognized over 2.5 years, leaving us with a 100% operating margin after the initial purchase and helping improve operating leverage as we scale.
We had restructuring charges of $0.5 million and non-cash asset impairment charges of $0.8 million during the quarter related to our announced restructuring activities in late January and early February. Last year, we had asset impairment charges of $12 million related to writing down the GuruShots acquisition, which has now been fully written down. We currently expect to take a total of approximately $1.1 million in additional restructuring and non-cash asset impairment charges during the third and fourth fiscal quarters. GAAP loss from operations was $2.2 million for the quarter compared to $12 million last year. GAAP net loss and loss per share for the quarter were $1.7 million and $0.12, compared to $9.2 million and $0.66, respectively, last year. Non-GAAP net loss and loss per share were $0.2 million and $0.01 compared to Non-GAAP net income and EPS of $0.5 million and $0.04 in the prior year.
Cash flow from operations was $0.7 million and free cash flow was $0.6 million for the quarter. While both were down from last year, we believe these should start to improve in the third and fourth quarters as our restructuring savings start to impact the bottom line. Adjusted EBITDA for the quarter was negative $0.1 million versus positive $1.5 million in the prior year. Note that D&A (Depreciation and Amortization) decreased 58%, or over $400,000 compared to last year due to the impairment of intangibles. From a liquidity standpoint, we finished the quarter with over $20 million in cash and cash equivalents. During the quarter, we bought back 245,000 shares under our $5 million share repurchase program that was announced in Q1. Thank you for listening to our second quarter earnings call, and I look forward to speaking with you again on our third quarter call in mid-June. Operator, back to you for Q&A.
Questions and answers
Thank you. We will now begin the question-and-answer session. The first question today is coming from Allen Klee from Maxim Group. Allen, your line is live.
Yes. Hi. Good afternoon. Could you please repeat what you expected the restructuring charges to be in your third and fourth fiscal quarters?
Hi, Allen. Because of the accounting rule, we can't really accrue certain severance and termination benefits until it's been communicated to the impacted employee. So that occurred in February, which falls in Q3. Additionally, we are looking at certain impairment related to our office space in Shanghai. Those costs will be recorded in either Q3 or Q4 as we look for a sub-tenant and negotiate with our current landlord. I hope that answers your question, Allen.
You're aiming for approximately $3.9 million to $4.1 million in annual cost savings. How does that relate to the previous base? Also, do you have an idea of how much of that will be realized in the fiscal third quarter compared to the fiscal fourth quarter?
I mean, the cost savings are annualized, approximately about $1 million per quarter, Allen.
But will it be fully at that run rate for the third quarter? Or will it be at that run rate in the fourth quarter or sometime next year? When do you think it will be at that $1 million savings?
Yeah. From the third quarter, we should start seeing that $1 million run rate per quarter in savings, before you factor in additional restructuring charges.
Thank you. Regarding the business and your comments on TikTok, you mentioned that it seems to be improving. I wanted to inquire about your average revenue per monthly active user. It appears that this metric remained steady for the quarter. Is that due to factors like subscriptions and marketplace spending influencing it? What accounts for this trend?
Yes. So we have a decline in advertising revenue, but it was partially offset by the growth in subscription revenue and also from Zedge Premium. Remember, the average revenue per monthly user will be a lower base because we have a lower MAU. So sequentially, our ARPMAU is still higher compared to last year or sequentially.
Okay. For GuruShots, can you help me understand how you have allocated a significant portion of the cost-cutting efforts related to it? Are you still pursuing initiatives to boost the top of the funnel, user engagement, and attract new users? What is the current status of that?
Yes, Allen, it's Jonathan. So in GuruShots, we have the existing GuruShots game as we know it today. The focus is on optimizing revenue performance and with reduced ad spend bringing in new users with a very attractive return on ad spend profile. Separate from that, we are now in the ideation/planning stage for what GuruShots 2.0 will be and how we will be able to improve the game materially, built on modern infrastructure in order to realize and recognize the value that we believe this game carries. We are not, as of yet, doing any development work on GuruShots 2.0. When I say development work, I mean coding and such. We're now in the ideation phase, game design phase, thinking about where we can bring the game in such a way that we can ultimately make a presentation to the Board and have a recommendation as to what should come next in terms of that part of the business.
Okay. In the past, the last quarter, you mentioned WishCraft and AI Art Master were in beta. Is there any change in that or what's happening there?
Those are still in beta. Obviously, with the restructuring, there's not a tremendous amount of effort being invested in those. I believe that sometime between now and the end of Q3, we will make a decision as to what we're going to move forward with or what we might just decide to move on from. But we're not there yet.
Okay. And similarly with AI audio, I think I heard you say something about looking to launch that maybe in the next couple of quarters. So any thoughts?
AI audio is something we are expecting to add to the Zedge marketplace in the paint suite in the next couple of months. I hope that this will actually be in Q3, and if not, in Q4. However, this will not be a separate app; it will simply be part of our AI suite of solutions, adding a new vista which is outside the realm of visual and entering us into the realm of audio.
If I take a step back and consider your company, I believe you have performed exceptionally well over the years in terms of monetizing advertising. The challenges seem to stem from GuruShots and monthly average users. It appears that you are downsizing and addressing GuruShots. Regarding monthly active users, how do you view the overall situation? While some factors may be macroeconomic, I'm uncertain about others. How do you plan to initiate growth in that area?
Yes. So I think that there are a couple of pieces in motion there. One is continued product innovation and resilience in terms of how we invest in the product and how we get users to engage with new features and the like. Another aspect of this relates to subscriptions, whereby we monetize better with subscriptions and subscribers. There is a funnel there regarding what happens second year, third year, and lifetime subscriptions. As you know, we've discussed the growth we have had with lifetime subscriptions. Our perspective is to continue building with new features and successfully monetizing those features, optimizing the segment of prospective subscribers, and attempting to get lifetime subscribers. For those users that do not subscribe, we will optimize our ad inventory to generate the greatest return on investment. This applies to the Zedge marketplace. Additionally, I should mention investment in paid user acquisition to complement the strong organic growth that we have for the Zedge marketplace, which we've been successfully doing.
In terms of GuruShots, part of the reason we undertook restructuring relates to giving us runway to redesign and come out with something that we believe will connect with users and spark the growth we think is achievable. This will also be a function of not only product but also investment in marketing. As I indicated earlier, we have considerably scaled back our marketing spend for GuruShots, yielding a much more attractive return on ad spend profile. We are keeping some firepower available for when GuruShots 2.0 comes to fruition so we can invest in and grow that user profile and base profitably. I hope that answers your question.
Yes. Thank you. You mentioned Lifetime subscriptions and pushing to grow them. At some point, does there become an issue if you just do lifetime subscriptions, and you start to lose subscription revenue because everyone signs up for the lifetime? How do you think about that?
That's a great question. Remember, we have a very large set of users that come into Zedge regularly, new users. The way we think about this is really segmenting based on where we see the best possible outcome for any user. With the robust organic growth coupled with the paid user acquisition we invest in, we have some room to maneuver here. It's not binary; we don’t only have lifetime subscriptions. If users don't sign up for it, they can't use the app. We offer multiple tiers: annual, monthly, and lifetime subscriptions, along with a free tier and features available through user interaction with a rewarded video. There are a variety of paths we can direct users down to achieve the best possible outcome per segment.
Thank you. I'm not sure if I understood your comments correctly regarding your expectations for advertising improvement in the next quarter. The quarter you just reported seems to be your seasonally strong quarter, and the next quarter typically isn't as strong. Did you indicate that you think your fiscal third-quarter revenue will be higher than fiscal second-quarter revenue, or am I misinterpreting what you said?
No, you are extrapolating. What we've said is we think that the challenge imposed with the unavailability of TikTok for about a month is behind us. TikTok being back in the market has the impact of increasing CPMs, and that is what we are experiencing. Coupled with that, TikTok being back in the market also helps us on the paid user acquisition side, as there are more platforms, so supply-demand dynamics are benefiting us. Seasonally, you are correct: our fiscal Q2 quarter is the strongest quarter. Although it's worth noting that with some optimizations we've done to our ad inventory, the pressure that existed when TikTok wasn't around is now in the rearview mirror. From a political perspective, my understanding is that the 75-day window has been extended, which could suggest the outcome President Trump is aiming for is finding an appropriate buyer to keep TikTok alive and well in the U.S.
Okay. Thank you.
Sure.
I'm done with my questions. Thank you very much.
Thank you. There were no other questions at this time. That concludes our question-and-answer session and conference call. You may disconnect your lines at this time. Thank you for your participation.